Staying ahead of the retiree Income LIC shakeout

See: > Staying ahead of the retiree Income LIC shakeout

WHF's slight premium appears particularly susceptible given its underperformance over the last several years. Having had a look at its most recent AGM presentation with fanciful performance figures, I will need to address these in a future post!

Extract from blog below:

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Summary: More than half of the market cap of the entire ASX Closed End Fund sector is in about 15 LICs (AFI, ARG, WAM, WLE, BKI, AUI, DUI, PL8, DJW, CIN, WHF, MIR, PIC, FGX, AMH) that are heavily favoured by retirees who largely hold them in superannuation pension accounts that are tax-free. Many of these retirees are narrowly focused on the reliable, fully-franked income these LICs generate rather than the Total Shareholder Return (which includes the change in share price). I refer to these LICs as Income LICs.

Marcus Padley recently wrote an article about similar retirees. It unintentionally exposes how irrational and lazy such retirees are if investing in LICs (not directly in shares). The catch-cry is "Marcus, I don't care about share prices, the kids are going to get those." Let's assume that's true, but are the "kids" going to keep them? My view is that they'll sell out; to pay down mortgages or for other purposes. Those who do wish to stay invested in shares are likely to switch to simpler, lower-cost, better performing ETFs like A200, VAS and VGS. So where is the new demand for these Income LICs going to come from?

In this post, I argue that because these Income LICs have, in performance terms, been made redundant by very low-cost, passive ETFs with none of their pitfalls, that eventually all are destined to spiral into discounts as sellers outweigh buyers. The long-term challenge for underperforming Closed End Funds (as almost all are) is to continuously create new demand. However, the same laziness that leads these Income LIC investors not to care about Total Shareholder Return, also explains their laziness in not switching to ETFs. This has made the Income LICs complacent, but when a discount eventually starts to spiral downwards, the extent of the implosion can be surprising. For example, AFI has 1.2 billion shares and eventually they all have to find brand new owners not just hang on to their existing owners.

Nevertheless, in the near term, the Income LIC discounts/premiums will continue to be primarily driven by relative dividend yield, reliability and franking. This presents opportunities and risks for those not monitoring these levels compared to peers, as well as the underlying performance and tax payments that make it possible.
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